What is Going on With Viva Energy?

What happened?

Given that it is was the biggest IPO to hit the ASX since Medibank Private Limited [ASX:MPL] listed in 2014, you would have expected a bit more fanfare when fuel refiner and distributor Viva Energy Group Limited [ASX:VEA] traded on the local bourse for the first time this week.

Viva plays an important role in powering the national fleet. All up, it supplies around one quarter of the total Australian fuel market.

While the name might not sound all that familiar, Viva has already floated one part of its business — the 400-plus service station sites it owns across Australia.

What has happened since the float?

With a final issue price of $2.50, the IPO valued Viva at just under $5 billion. Not a bad return for its owners — commodity-trading behemoth Vitol SA — which bought the assets from Royal Dutch Shell in 2014 for $2.6 billion.

Since then, it has invested a further $1 billion upgrading the business, including buying the jet fuel business from Shell.

After the IPO, Vitol retains around 45% of the shareholding. Reports have the remaining 55% split between ‘cornerstone’ investors with around a 25% holding, and the rest divided between institutional and private investors.

What will happen next?

Despite the $2.50 issue price, the first day of trading saw Viva’s share price slide to a low of $2.41. Certainly not the gain investors hope for when an IPO first goes to market.

Despite Viva’s less than inspiring first days, the fuel market in Australia is a hive of activity. After the ACCC blocked the sale of Woolworths owned sites to BP, Caltex Australia Ltd [ASX:CTX] recently signed a 15-year deal to supply Woolworths.

Although they are the incumbent supplier, Caltex would have lost around a quarter of its earnings before interest and tax (EBIT) if the deal with BP had gone ahead. Woolworths, like Caltex, is busy working out what best to do with their vast networks.

Woolworths is considering an IPO of its petrol business. And Caltex is considering floating its vast pipelines, import terminals, refinery and retail properties into a separate REIT. Much like Viva Energy did when it floated a REIT with its own property assets — Viva Energy REIT [ASX:VVR] — in 2016.

While growth in fuel sales is expected to remain flat, the real catalyst for Viva and other suppliers is the ever-expanding jet fuel market. Viva put its growth in aviation fuel at 19% over the last couple of years. And this growth is what might help propel its share price higher.

Matt Hibbard,
ForMarkets & Money

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